More on Greece’s ‘Voluntary’ Deal

Today’s Brussels Beat column pointed out that the bigger the losses bondholders are forced to suffer in a restructuring, the less sense it makes to call it voluntary.

It suggested that a so-called “voluntary” restructuring for Greece negotiated by the Institute of International Finance would probably end up by triggering payouts on credit default swaps and a bunch of (mostly unsuccessful) lawsuits, as would any coercive exchange. Moreover, “coercive” exchanges did not have to be disorderly.

I’ve had some correspondence since from people who don’t agree. Here’s one view:

Advertisement

“Isn’t the difference between what happens with a voluntary approach and a coercive one the difference between Uruguay and Argentina? The latter still has no real market access after 11 years and counting. Coercive forced by IMF/EU means they have to finance Greece for a LONG time…”

He continued that Russia–which forced its bondholders to take big losses after its 1998 default

“can borrow again because a) it has many tons of oil and b) devalued its currency on default. Give those to Greece and I’d step up to lend in a year or two.”

But, wrote I, in response: “The haircuts on Uruguay were 5-20% and those on Argentina 70%. The deeper into haircut territory you go, surely the ‘voluntary’ fig leaf becomes less supportable.” The Greek haircut is 50%–meaning the bonds’ face value is cut in half.

There’s also the question of whether the holdouts will be forced into the deal. It’s true, as another correspondent pointed out, that if the deal is really voluntary and it doesn’t bind all holders of the bonds, payouts under credit default swaps probably wouldn’t be triggered.

However, if the rest are subsequently forced into the deal to make the sums add up, as many analysts consider likely, then CDS payouts are likely. The more bondholders accept the deal, however, the smaller the benefit of forcing in the remaining holdouts, however. There is an acceptance rate at which leaving free riders to free ride becomes the lesser of the evils

Here is another correspondent, writing about the impact on the European Central Bank and its Secondary Market Program:

“You omit an important aspect of the problem. The ECB wanted a voluntary deal so that it could continue to claim that Greece did not default, that its SMP holdings are not special, and that the ECB does not accept defaulted bonds as collateral. All that is gone with an involuntary deal. The precedent will be set for subordination of private sector bondholders to the ECB SMP holdings in Portugal, Ireland, and beyond. This will undermine the effort to induce the private sector to return to the [peripheral government bond markets].”

This is indeed an issue I omitted to discuss. You could say the ECB is sustaining a fiction if it argues the deal is voluntary at a 50% haircut and even deeper writedowns for financial institutions, but that’s not really an argument. Here’s part of my response. D stands for Default and SD for Selective Default:

“Even if the holdouts are not forced in and the deal is ‘voluntary,’ the ratings agencies will declare Greek bonds D and Greece SD or D. (That’s because some bondholders are worse off as a result of the exchange.) There is the assumption that the SD state will not last for very long—so the other euro zone governments can step in provide alternative collateral for this short period.

“I think for the coerced exchange to be worse from an ECB standpoint, you have to assume that a Greece D rating [for an enforced deal] will be in place longer than a Greece SD rating [for a voluntary deal]. I have no idea whether this in fact would be the case. In fact, under a coerced deal Greece’s debts would presumably be lower and Greece better able to sustain them—but I’ve no idea what impact this would have [on the duration of the default rating.]“

Comments (5 of 9)

The fact of life is that the Greek government cannot pay interest and repay principal on maturing debt. The interest cost of financing in the free , global sovereign bond markets is so high that the government cannot afford to refinance. The principal issue is that the Greek government has too many public employees at too high a level of wages and retirement and health care benefits. The Greek government has had 2+ years to manage this problem. The Government has not managed the problem. Conclusion: Greek government is bankrupt. Greek government bonds are in default. End of analysis. In the USA when a state or local government cannot pay their current and future bills, they are cut-off from financing and manage their expenses down and raise revenues by raising and collecting taxes. The federal government does not step in with unlimited financing, year after year, while the state or local government "deals with their problems." Why does the EU and the IMF step in with 100s iof billions of euros to give Greece over 2 years to deal internally with their obviously self-created fiscal problems?

3:17 am January 30, 2012

Paco wrote:

Greece has defaulted if the bondholders are taking such a big loss. It's simple math. Oh yeah, it also looks like the bondholders are going to be screwed by Germany. How? Germany has about two trillion tucked away and could easily make good on Greece's debts in order to prop their beloved humpty dumpty EU up a bit longer. If I were a bondholder, I'd insist on the last penny. Germany would pay up and the Greek austerity problem would be solved.

5:26 pm January 25, 2012

Anonymous wrote:

If Greece defaults they default on all bonds correct? Even the onew owned by ECB They must have insurance (default swaps) that they think will protect them. Since the same banks that sold the insurance (default swaps) are the ones that decide if an event happened and to pay on them

1:46 pm January 22, 2012

Greg wrote:

For the Greeks to be called a nation of Crooks by people who embrace Hedge Funds and all the International monetary system of profit and destruction...is an insult, as it would be even for real Crooks in a similar situation. Greeks have paid so far their depts, with high interest rates. The Hedge Funds who try to force a default so they can collect the CDS money (see gambling), when they have purchased Greek Bonds at 40% of its nominal value, are justified to do so Leo and Theodora? Who are realy the real Crooks in this deal, I wonder.

4:20 pm January 21, 2012

Jack wrote:

This is absurd!

For the past year or so we have been conditioned to believe that such a haircut (now at 70%! as of writing!) could not possibly avoid triggering a default, yet lo & behold, those in control have finessed it so that this enormous loss will not be classified (by whom I might ask?) as a default. I am simply incredulous!

This goes to show that those in control merely re-invent the rules to suit their purposes at any given time. We have no say in the matter, & are mere pawns of the world controllers, whoever they may be.

I am not a conspiracy theory believer, I am only calling it like it appears. No one can properly anticipate how those in control will next manipulate the situation to their benefit.

I will not be at all surprised next to discover that this all falls apart in the twinkling of an eye, yet only after the world has been brainwashed into accepting that the situation is safe, so that those in control may next profit from derivative trades against the success of the rescue operation.

Satan (take as a metaphor as desired) is the father of lies, & world finances are its to deceive us.

About Real Time Brussels

The Wall Street Journal’s Brussels blog is produced by the Brussels bureau of The Wall Street Journal and Dow Jones Newswires. The bureau has been headed since 2009 by Stephen Fidler, who was previously a correspondent and editor for the Financial Times and Reuters. Also posting regularly: Matthew Dalton, Viktoria Dendrinou, Tom Fairless, Naftali Bendavid, Laurence Norman, Gabriele Steinhauser and Valentina Pop.